SingTel – UOBKH

Intense Competition: Limited Upside in Investing in Parent

Competition in the telecommunications sector has remained intense with the launch of Mobile Number Portability (MNP). Singapore Telecommunications (SingTel) and StarHub both continued their aggressive marketing activities with high mobile phone subsidies while offering six months free subscription to re-contract as well as secure new customers.

High marketing and promotional expenses expected to continue. As highlighted in our strategy report, EBITDA margins for the Singapore telecommunications sector fell by 7.8% in 1Q08. The decline in margins for the sector is the largest on record due to aggressive marketing and equipment subsidies. We estimate equipment subsidies for SingTel (Singapore) at S$115m in 4QFY08, the highest level since 4QFY05. Cost of Sales (net of equipment sales) as a percentage of Services EBITDA was 58.1%, the highest level on record. We expect this to continue for the next two quarters given the continued high promotional activities.

Better off buying the associates? We estimate that the market has priced in a premium of S$0.63 for SingTel as a holding company at present, given the current market prices of its associates. Even if we were to use the highend of consensus estimates for SingTel and Optus of S$1.76, investors still pay a S$0.15 premium for SingTel as a holding company. Also, we estimate that investors are currently paying about 19x FY09PE for SingTel and Optus after stripping out the current market prices for SingTel’s associates, which is far higher than the industry average of 12-13x. Coincidentally, by imputing a PE of 13x for SingTel and Optus, we get a value of S$2.96 which is very close to our recommended entry level of S$3.00. Given the current disparity in value, investors can look to short SingTel and go long on the associates in
the short term.

Maintain HOLD recommendation, target price lowered to S$3.50 (previous S$3.76). We maintain our HOLD recommendation on SingTel and have lowered our target price from S$3.76 to S$3.50. We have adjusted our DCF valuation for SingTel and Optus from S$1.53 to S$1.28 as we have adjusted downwards our earnings for FY09, FY10 and FY11 by 4.4%, 1.8% and 1.4% respectively and adjusted our WACC from 8.5% to 8.9%. Together with our estimated dividend of S$0.125 for FY09, our recommended entry level for SingTel is below S$3.00.

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